EPA recently released its proposed "Tier 3" rule that is estimated to save 2,300 American lives per year by requiring the oil industry to reduce the average sulfur content in gasoline from today's 30 parts per million to 10 parts per million. Not surprisingly, the industry's primary lobbying association, the American Petroleum Institute (API) is strongly opposed, claiming the EPA’s Tier 3 proposal would increase the cost of gasoline production by up to nine cents per gallon or roughly ten times what the EPA calculates the cost to be in its own assessment.

A closer look at the API's study, however, reveals that the overwhelming majority of the API's “costs” are not actually costs at all but windfall profits for the refining industry.

Oil Industry's Cost Claim Includes Huge "Windfall" Profits

The API study, conducted by consulting firm Baker O'Brien, gives both a low case estimate (6 cents per gallon) and a high case estimate (9 cents per gallon) for the costs of the cleaner gasoline standard. API uses the 9 cent number in its press releases which is roughly ten times higher than the EPA's cost estimate of 0.89 cents per gallon.

In its Draft Regulatory Impact Analysis, the EPA found that the main difference between these two cost studies was that the API study assumes a profit margin of 4 to 7 cents per gallon for installing the new equipment. A “windfall” profit for the refining industry of $4 to $8 billion annually or the equivalent of a 180 to 340% rate of return on investments for meeting the new clean gas requirements.

The remaining 1.23 cent per gallon difference between the API cost study and the EPA cost study is largely due to two reasons. First, the API commissioned study assumes a 10% rate of return on investment (ROI) after tax rather than a 7% pre-tax return in the EPA study. When the two studies are measured “apples to apples”, the API cost falls from 2.12 cents per gallon to 1.58 cents per gallon. Second, the remaining 0.69 cents per gallon difference can largely be attributed to differences in capital costs with the API study using cost estimates that are 350% higher than the industry average estimates used in the EPA study.

Refinery Companies Back Away from API’s High Cost Estimates

After the release of the EPA's Tier 3 proposal, US refiners saw their stock prices drop due to concerns over the oil industry's high cost claims. In response, some refiners have now been providing investors with new, more accurate estimates of their true compliance costs.

For example, Valero Energy, the largest independent refiner in the U.S., recently told a group of financial analysts that its Tier 3 compliance will likely cost the company $300-400 million to meet the new EPA standard. Using the EPA's marginal cost assumptions, a $400 million cost would equate to roughly 0.63 cents per gallon of gasoline.

This 0.6 cents per gallon cost of Tier 3 compliance would make the average annual costs to Valero around $95 million per year, or just 2% of the $4.45 billion it made in pre-tax earnings on refining in 2012.

In addition to Valero, several other large independent refiners have released cost estimates for Tier 3 compliance and their costs appear to be even lower than Valero’s. Based on these company releases, API’s mid-rate cost forecast is up to 20 times higher than the actual costs of many of the companies it represents with even one company, Northern Tier, indicating that it would not have to make any investments in order to be Tier 3 compliant.

In sum, API is overplaying the cost burden of the EPA’s new clean gas rules by a factor of 10 or more based on cost data from its own members which have the costs at well less than a cent a gallon. API’s claims rest on the assumption that refiners would be allowed to capture an additional 4 to 7 cents in profits from installing the low sulfur equipment in their facilities at a cost to consumers of $4 to $8 billion a year. Looking at the data released by Valero and others, however, it seems clear that the costs associated with the EPA’s low sulfur rule will be manageable and far outweighed by the benefits of saving 2,300 lives each year.

About

Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.